If you hire people to work in your home, you may be legally obligated to pay their federal and state payroll taxes. You must also indicate on your own annual tax return that you employ household workers.
The Internal Revenue Service defines a household employee as an individual hired to work in or around your home and who works under your direction. The person is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it doesn't matter:
- Whether the work is full-time or part-time;
- That you hired them through an agency or from a list provided by an agency or association; or
- Whether you pay the worker on an hourly, daily, or weekly basis, or by the job.
Common examples of household employees are cleaning persons, maids, nannies, and drivers. Babysitters, home-health aides, and private nurses also generally fall under this category. If you manage the work and how it gets done, the worker is your employee.
What are household employment taxes?
You must pay household employment taxes if, in 2018, you compensated any one household employee cash wages of $2,100 or more. You need to withhold and pay Social Security and Medicare taxes at 15.3 percent of cash wages. Your employee's share is 7.65 percent. The IRS notes that you can choose to pay it yourself and not withhold it. Your share of Social Security and Medicare taxes is 7.65 percent.
Don't count wages that you pay to your spouse, any children younger than 21, a parent, or any employee younger than 18 at any time in 2018.
You must also pay federal unemployment tax if you compensated household employees total cash wages of $1,000 or more in any calendar quarter of 2018. The tax is 6 percent of cash wages. Wages over $7,000 a year per employee aren't taxed. You may also owe state unemployment tax.
You have options regarding federal income tax withholding. For example, you can withhold a worker's share of Medicare and Social Security taxes from a paycheck or you can pay the individual's share yourself. If you choose to cover the payment yourself, you can set the money aside in a separate bank account to ensure you have the funds come tax time.
You're not required to withhold income tax on wages you pay to a household worker unless the worker requests it. If you agree to withhold the tax, have the employee fill out Form W-4 (Employee's Withholding Allowance Certificate), which helps determine the amount of income tax to withhold.
If you fail to pay employment taxes for a household employee, you will generally be liable for the employment taxes that you should have withheld and paid.
Are household employees' wages tax-deductible?
You can deduct wages that you pay certain household employees, such as a nanny, as part of the dependent care expense deduction. In addition, you can deduct the employer portion of Social Security and Medicare taxes and any federal and state unemployment taxes you pay on behalf of your in-home workers.
Additional obligations as a household employer
As a household employer, you are required to have an employer identification number (EIN) — this is different from your Social Security number. You can obtain an EIN by completing federal form SS-4, Application for Employer Identification Number.
The individuals you hire to work in your home must be eligible to work in the United States. You must verify each worker's identity and work authorization by completing a Form I-9. The employee must complete Section 1 of the form no later than the first day of employment and the employer must complete Section 2 within three business days of the employee's first day of work. You can download a Form I-9 from the United States Citizenship and Immigration Services website. Form I-9 compliance has gained heightened importance with immigration and national security in the spotlight.
Maintain accurate records
As a household employer, it's essential that you keep comprehensive records of the federal and state taxes you pay (or withhold at your worker's request). Every payday, be sure to make a record of each employee's:
- Cash and non-cash wages;
- Any federal income tax, Social Security tax, and/or employee Medicare tax you withhold (or pay for your employee); and
- Any state employment taxes withheld.
Also, make sure you keep copies of Schedule H (reporting household employment taxes paid) and Form W-2 (stating the worker's annual wages, the taxes you pay, and other related information).
Employing people in your home brings important tax responsibilities. Some household employers may have the time and expertise to handle all the paperwork and requirements of the IRS tax code, but many don't. An expert can help you understand obligations and pay household employees to meet specific tax requirements.